March 6, 2009

Bond sale and endowment action are the last two pieces of fiscal-recovery puzzle

By voting to issue up to $500 million in taxable bonds and to reduce the endowment payout by 15 percent, the Cornell Board of Trustees has put into place the last two pieces of a fiscal-recovery puzzle aimed at covering a $200 million budget deficit.

"Now we have a holistic, robust plan," said President David Skorton following the board's unanimous approval of the measures at its March 6 meeting in Ithaca.

The goal of the bonds is to provide the university with working capital. The 15 percent reduction in endowment spending, combined with additional cuts planned through fiscal year 2012, aims to match the projected reduction in endowment earnings. "In other words, you can't keep taking money out as if it were a bigger endowment," Skorton said. The endowment decreased by 27 percent in the second half of 2008.

"The raising of the $500 million in working capital is really a very intelligent thing to do in a time of financially constrained markets," said board chairman Peter Meinig '61, BME '62. "The fact that Cornell's credit is so good makes it attractive to us to sell those bonds."

The bonds are expected to go on sale in the next few months, after the university consults with its advisers.

This is the first time in recent memory that the university has issued taxable bonds, although it has regularly issued nontaxable bonds to fund construction projects, Meinig said. "Interest rates are relatively low. From an issuer's point of view, I'd say it's a good time to issue bonds."

Skorton said that buyers will see the bonds as a safe investment, given that Cornell's bond rating is among the highest for U.S. universities. "In this climate, it's no longer a matter of making a big killing on investments; it's a matter of safety and security, and I think people will see this as a secure investment," he said.

The two measures follow others that the university has already undertaken. They include a 5 percent budget cut in fiscal year 2010, starting July 1; creation of a strategic plan, still in the works, to cut an additional 5 percent in fiscal year 2011; an increase in tuition; accepting 100 more freshmen in the fall; and workforce reductions.

Cornell is among many peer institutions trying to make up for endowment losses through debt, although, as Skorton said in his statement today, Cornell's approach is "more modest in size to that being utilized by other universities." In January, Princeton sold $1 billion in bonds, its first taxable issue since 1994. Harvard, the country's oldest and richest university, has sold $2.5 billion in bonds since December. Most recently, the University of California issued $458 million in bonds March 5.

Cornell's board considered other fiscal-recovery options during its discussions, Meinig said, but raising debt has been on the table for months. "It's the prudent thing to do. We don't know if the market is going down. We want to have that liquidity to be able to fund the plan that the president and provost have put in place. We think we're doing it in the correct way."